History of Economic Thought

&
Friedrich August von Hayek

Micro and Macro Economics

Course instructor: Prof. Dr. Roland Menges

Submitted by: Carlos David Yanez de Leon

Matriculation number: 556566

Europa Universität Flensburg

Meng. Energy and Environmental Management

December 13th, 2021

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In this submission I will elaborate about how history’s economics have been influenced by
Friedrich August von Hayek throughout the years and with reference to his contributions to
past and present society.
It has a high degree of importance to focus on this subject because we will be able to
comprehend more about earlier ideas of economic cycles, government’s role in society, how
markets interact with the government and with the investors and address society’s concerns in
the everchanging economic scenario.

I will explore into Friedrich August von Hayek biography in my effort to enlighten about his
involvement in the world’s economy. We need to know in what environment he grew up, what
were his influences, expectations, and motivations to go above and beyond in a journey that
had such important relevance and influence that it is worth of examination and reflection
nowadays.

F. August was born in May 1899 in Vienna in the times of the Austro-Hungarian Empire just
in time for World War 1. His father was a medical doctor at the ministry of health and a
university professor, both of Hayek’s grandfathers were scholars.
The academic activity of his family permeated and inspired Hayek with their thoughts and
knowledge (Ebenstein, A. O., 2001, pp. 7-8). Hayek had a cousin on his mother’s side of the
family named Ludwig Wittgenstein. Ludwig was a philosopher of logic, mathematics,
language and of the mind; he is presumed to be one of the greatest philosophers of the
modern times (Biletzki, Anat; Matar, Anat, 2020).

In 1917 Hayek joined the army forces of the Austro-Hungarian Empire, time in which he had
philosophical conversations with his cousin Wittgenstein; later, Hayek wrote an autobiography
in which he depicted that his life and work were influenced by his cousin’s methods and
philosophy (H. F. A. et al., 2015, p. 51).

Hayek’s war experience finally led him to the academic life. He was deeply motivated by the
idea of avoiding another war, he wanted to study those errors that steered into a political
catastrophe (McCloskey, D. N., 2000, p. 33).
He was in pursuit of the same primal goal as all of us students in this program: a better world.

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Hayek enjoyed reading books of philosophical works, ethics, economics, and many others. He
studied at the University of Vienna earning first an undergraduate degree in Economics
followed by a PhD in Law and political science in the 1920’s. During these studies, Hayek was
influenced by his professors’ democratic socialist ideas in the study field of Marxism.
Shortly after graduating, Hayek performed as a specialist for the Austrian Government
reviewing details on the Treaty of Saint-Germain-en-Laye signed in 1919 concluding WWI.
This treaty declared the dissolution of the Austro-Hungarian Empire and in this same document
several central powers accepted part of the responsibility for starting the first world war.
During this time at the government’s office, his boss was Ludwig von Mises, the extraordinary
economist. Through this relationship Hayek was motivated to read von Mises famous book,
Socialism. The ideas written on this book were so true to Hayek that he migrated his thinking
into classical liberalism (Britannica, T. Editors of Encyclopedia, 2021).

He continued his career in North America, more specifically in New York, where he worked
as a research assistant on a doctoral program in the studies of the monetary stabilization but
did not finish due to his poor social life and because he and his family were undergoing an
economic deterioration (Ebenstein, A. O., 2001, p. 35).

After quitting his job at New York, he went back to Vienna. At this point in time Dr. Hayek
had lived and served in WWI, studied a PhD in Europe’s region previously known as the
Central Power, and worked in North America, supporters of the Allie forces. Along this journey
he met several of the most influential philosophers and economists at the time.

Returning to his home city, I can safely assume that he gathered a wide assortment of wisdom
through the previously mentioned experiences, and I also consider that Hayek gained enough
popularity to be an influencer of his time.

Hayek continued gaining popularity and excellent reputation with his hard work and dedication
in 1927 through the creation of the Austrian Institute of Economic Research. With the help of
his college Ludwig von Mises this non-profit association is then emerged, and still active, with
the purpose of analyzing global economic development.

Hayek is also known for his business cycle theory which states that every economy goes
through a recession and recovery period natural to its own process due to excessive growth in

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artificial low interest rates (Polleit, T., 2007). A clear example of this is the excessive printing
of money in the USA in 2020, reaching 22% of all the circulating American dollars (Cage, M.,
2020).

Shortly-after, in 1931, he travelled to the United Kingdom where he joined the staff of the
London School of Economics as a faculty member and developed one of his renowned theories
saying that private investment in the market is better for the economy rather than the
government’s expenditure. This specific theory is then explained in one of his books titled “The
Constitution of Liberty” published until 1960. Being the philosopher that he was he wrote this
book with a very well detailed philosophical background; he argued that freedom of action is
imperative in a society that strives for economic progress. In other words, the government must
not paralyze private initiatives and must apply rules that create fair and equal grounds for all
citizens to participate in the market (Miller, E. F., 2010).

During his time in London, he met John Maynard Keynes, another renowned economist, with
whom Hayek exchanged letters of discussion about their theories because Keynes believed that
the government should be the main contributor to the economy rather than the people it served.

Hayek remained in the United Kingdom for the next 10 years approximately, formed a family
and acquired the British citizenship. In 1947 he became a fellow at the Econometrics Society,
still active, gaining even more fame. This international society supports the progress of
economics through research in mathematics and statistics (The Econometric Society, et al.,
2014).

During these years, Hayek wrote his best seller book “The Road to Serfdom”, published in
1944 reaching the American audience turning into a complete success (Quarles, R. K., 2019).
In this book Hayek states that the idea of control with a centralized system is flawed because
information is widely spread, therefore any individual entity cannot possess enough
information to make the right decision. If this idea is scaled for economic purposes in society
it translates into saying that an organization such as a centralized government is not capable of
gathering sufficient information to supply with the optimal decisions or actions.

Nowadays the idea of decentralization is extremely popular. We live in the internet era where
telecommunications alongside computer technology evolve at accelerated rates. Anyone can

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buy or provide almost any kind of services and goods through the internet, and it has reached
a point where economic freedom in junction with freedom of content are essential to the users
but constrained by governments, banks, and other controlling organizations. Consequently the
“Web3” has now spawned.

What is Web3? To reach Web3 first “Web1” was created, the first iteration of the internet
which lived through the 90’s and it is considered to be the “read only web” which means that
content creators could only provide text for the users for them to read or images to simply enjoy
what was being projected in their screens. After Web1 came Web2 in the early 2000’s which
is the internet that all of us experience currently. It is an interactive and social internet. Videos
can be uploaded for the entire world to watch, shops selling internationally without the need of
a physical showroom, schools providing online education, online payment transactions and
many other features.

Web3 is the latest “transformation” of the internet where decentralization is the core idea. This
transition enhances the Web2. Data on the internet is now starting to migrate into a verifiable,
self-governing, distributed, trustless, decentralized system just to mention a few of the benefits.
This means that developers create applications that are stored and run in more than one server.
In other words, servers that have the developer software installed have the capacity to
contribute to the functioning and participate in any given number of applications. With the help
of excellent coding all data is processed and available for any user to retrieve thus eliminating
a central point of control (Web3 Foundation Council, 2020).
We can trace this “Web3” concept to Hayek’s idea of decentralized economy very easily by
emphasizing that society’s interaction within the market is much better than just one entity
supplying it all.

In 1950 Hayek returned to America but now to the University of Chicago as a Professor and
continued participating in the economic organizations of the country and published The
Constitution of Liberty in 1960 as previously stated. A couple of years after, he returned to
Europe to work at the University of Freiburg in West Germany where he published another
book called “Law, Legislation and Liberty” and retire in 1968.

In 1974 Hayek, next to Gunnar Myrdal, were awarded the Nobel prize for their contribution to
economics with their “pioneering work in the theory of money and economic fluctuations and

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for their penetrating analysis of the interdependence of economic, social and institutional
phenomena” (NobelPrize.org., n.d.). This recognition is proof of how relevant his work is for
the improvement of economic systems.

In his late years Hayek became some sort of political guru having influence over Margaret
Thatcher reign in the 80’s. She even publicly stated that she believed in his theory on The
Constitutional Liberty book, setting the bar high for the government to improve their policy
making and calling for the markets and private investors to act upon the struggles of economy
(Ranelagh, J., 1991).
Then he let the whole world new that he supported war because he agreed with President
Ronald Reagan’s decision to invest in the army for the sake of world peace, justifying that the
Soviet Union needed to be kept under control. Hayek was even invited to the White House and
President Reagan said that he was influenced by Hayek (Ebenstein, A. O., 2001, pp. 207-208).
This is quite a controversy considering that his initial motivation was to prevent war, not to get
ready for it.

F. August von Hayek died in Germany 1992, experienced a very productive life, and inspired
many others. He left a great set of theories and books for us to study and improve today’s
history.

References

Ebenstein, A. O. (2001). Chapter 1 (pp. 7-8). essay, Palgrave.

Biletzki, Anat; Matar, Anat, "Ludwig Wittgenstein", The Stanford Encyclopedia of

Philosophy
(Spring 2020 Edition), Edward N. Zalta (ed.), Retrieved December 2021, from
https://plato.stanford.edu/archives/spr2020/entries/wittgenstein/

Von, H. F. A., & Kresge, S. (2015). Hayek on Hayek: An autobiographical dialogue.

Routledge (p. 51).

McCloskey, D. N. (2000). In How to be human: Though an economist (p. 33). essay,

University of Michigan.

Britannica, T. Editors of Encyclopaedia (2021, September 3). Treaty of Saint-Germain.

Encyclopedia Britannica. Retrieved December 2021, from
https://www.britannica.com/event/Treaty-of-Saint-Germain

Ebenstein, A. O. (2001). Chapter 4 (p. 35). essay, Palgrave.

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Polleit, T. (2007, December 11). Manipulating the interest rate: A recipe for disaster:
Thorsten Polleit. Mises Institute. Retrieved December 6, 2021, from
https://mises.org/story/2810.

Cage, M. (2020, December 19). $ 9 Trillion story: 22% of the circulating USD printed in
2020. Somag News. Retrieved December 1, 2021, from
https://www.somagnews.com/9-trillion-story-22-of-us-dollars-printed-in-2020/.

Miller, E. F. (2010). Hayek's the Constitution of Liberty: An account of its argument.

Institute of Economic Affairs.

The Econometric Society, E. at. (2014). Fellows | The Econometric Society. Retrieved
December 5, 2021, from https://www.econometricsociety.org/society/organization-and-
governance/fellows.

Quarles, R. K. (2019). Speech by vice chair for supervision quarles on Friedrich Hayek and
the price system. Board of Governors of the Federal Reserve System. Retrieved
December 5, 2021, from
https://www.federalreserve.gov/newsevents/speech/quarles20191101a.htm.

Web3 Foundation Council. (2020). About. Web3 Foundation. Retrieved December 2021,
from https://web3.foundation/about/.

The Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel 1974.
NobelPrize.org. (n.d.). Retrieved December , 2021, from
https://www.nobelprize.org/prizes/economic-sciences/1974/summary/.

Ranelagh, J. (1991). Thatcher's people: An insider's account of the politics, the power and the
personalities. HarperCollins.

Ebenstein, A. O. (2001). Chapter 26: Influence. In Friedrich Hayek a biography (pp. 207-
208). essay, Palgrave.